Annual Report 2012 - Swiss Life

148 Consolidated Financial Statements
Distribution policy
The distribution policy seeks to align the interests of the different groups of stakeholders. Holders of
traditional life insurance policies favour a guaranteed minimum interest rate coupled with regular
and appropriate discretionary participation whereas shareholders place greater emphasis on returns
commensurate with the level of risk they are exposed to. The focus of the Swiss Life Group lies on the
sustainability of the business model and should balance the policyholders’ and shareholders’ expectations.
External constraints must be considered in the definition of the distribution policy. Important elements
which influence such policy are minimum guaranteed interest rates and the statutory minimum
distribution ratio (“legal quote”), which strongly depend on the regulatory environments of the
Swiss Life Group’s insurance operations.
Product design
The targets of risk management are supported by product design principles. Product design defines
which guarantees and benefits are built into a specific product to respond to the demand from and
expectations of customers. The actuarial bases used for this purpose should ensure that each individual
product generates a sufficient contribution margin. To ensure that the Group’s principles are
observed, guidelines on product management and underwriting have been introduced to harmonise
the local guidelines and to ensure that they are in line with the guidelines of the Group. As the
Group’s insurance entities operate in a number of different countries, the local regulatory constraints
may have an impact on the business units’ product range. These constraints must always be obeyed.
5.4 Financial risk management objectives and policies
The Group is exposed to financial risk through its financial assets, financial liabilities (primarily
investment contracts and borrowings), reinsurance assets and insurance liabilities. In particular, the
key financial risk is that the proceeds from the financial assets are not sufficient to fund the obligations
arising from the insurance and investment contracts, as well as from borrowings and other
liabilities. The most important components of the financial risk are interest rate risk, equity price
risk, credit risk, currency risk and liquidity risk.
The risk budgeting and limit setting described above ensure that interest rate risk, equity price risk,
currency risk and credit risk remain under control. The corresponding market risk capital, interest
rate risk capital, currency risk capital and credit risk capital limits as well as exposure limits for currencies
and net equity for each relevant insurance operation are defined based on the risk appetite. These
limits are assessed and reported on a monthly basis.
Hedging
The Swiss Life Group uses derivatives within the strict limits set by the applicable insurance legislation
and by internal guidelines. Derivatives are primarily used to manage the exposure to equity securities,
interest rates, counterparties and foreign exchange rates. The main instruments include index
futures and option structures in stock markets, bond futures and swaps in order to manage duration,
currency forwards in order to manage currency risk and credit default swaps in order to manage
counterparty risk. Within certain limits, derivatives are used to enhance returns on the existing portfolio.
The types of derivatives generally permitted for usage within the Swiss Life Group as well as the
list of allowed over-the-counter trading partners have been approved by the Group Risk Committee.
Swiss Life – Annual Report 2012